How Asia is funding the U.S. military industrial complex

If you've been following the newswires, you may have noticed Trump's tough talk on the 'crown jewel' of American foreign policy and power — NATO — and its contribution to defending the North Atlantic.

Formed in 1949 by the U.S. and a collection of western European nations, NATO has essentially been the most powerful military alliance in human history.

It was established before the Cold War had really taken off, but at a time when the rising global power and threat of Soviet Communism was becoming very apparent.

So, from an Asian perspective, I wonder... why don't we have our own mutual defense 'treaty organization'?

With the exception of the now-dissolved Southeast Asia Treaty Organization, or "SEATO", created as part of the Truman Doctrine, there hasn't been a military alliance in Asia anywhere near the scale of NATO.

Here's a hint — take a look at the top 10 foreign U.S. Treasury holders for May 2018:

Notice 4 out of the top 10 bondholders are in Asia, not to mention the top two positions. Why is this the case?

First off, multilateral trade agreements and government-sponsored manufacturing drives have allowed many Asian countries to generate massive trade surpluses by exporting to the developed economies of the West.

These surpluses have historically been tolerated by the U.S., as big chunks of them are returned to America via U.S. Treasury purchases.

So, sizable amounts of Asian economies' trade surpluses go back into funding the U.S. government budget.

The U.S. defense budget was approximately US$818 billion in 2017, or around 3.1% of its GDP.

A lot of that cash went to funding its homeland defense, as well as its ongoing presence in conflict zones across Africa and the Middle East. A large portion also went to its 220 military bases and 66,000 troops stationed in Asia.

These numbers continue to increase as China also ramps up its own spending, scaring its neighbors in the process, particularly in the South China Sea.

So, by using trade surpluses to buy U.S. bonds, many Asian countries are also funding a U.S. military presence in their own backyard. For countries like Japan (2nd biggest holder of U.S. debt), Taiwan (10th), and South Korea (15th), it makes sense to fund this military spending, ultimately keeping China at bay.

It allows the U.S. to commit to upholding Japanese and Korean security through bilateral pacts such as the Treaty of Mutual Cooperation and Security with Japan, and the Mutual Defense Treaty with Korea.

Smaller Asian nations, such as Taiwan, The Philippines, and more recently Vietnam, are also guaranteed a level of security by the U.S. through 'unofficial', capital-based links that revolve around debt and bonds.

But that begs the question of China - why are they funding the U.S. military through their high purchases of U.S. debt?

The answer is trade. The Chinese have traditionally considered the health of their export economy as more important than the relative military strength of the U.S. Their heavy purchase of U.S. bonds has traditionally protected them from aggressive U.S. tariffs...

However, this might change as the unfurling trade war makes it more difficult to sell to the U.S., and China finds new ways to generate cash, without relying too heavily on exports to the West.

So back to our original question — why isn't there a major NATO-style military alliance in Asia? Asia simply hasn't needed one up to this point, as their bond purchases have effectively created an 'Asian Defense Alliance' with the US.

Asia has been effectively funding the U.S. military-industrial complex, and ultimately, the American Empire.

So what happens now, as the no. 1 bondholder, China, expands its empire? (Not counting the Fed who is the biggest bondholder in the grand scheme of things, but that's another discussion.)

For decades, US presidents have tread carefully. Now, that is beginning to change.